Photon Dynamics has entered into indemnity agreements with
certain officers and directors which provide, among other
things, that Photon Dynamics will indemnify such executive
officer or director, under the circumstances and to the extent
provided for therein, for expenses, damages, judgments, fines
and settlements he or she may be required to pay in actions or
proceedings which he or she is or may be made a party by reason
of his or her position as a director, executive officer or other
agent of Photon Dynamics, and otherwise to the fullest extent
permitted under California law and Photon Dynamics Bylaws.

In July 2007, in connection with the purchase of Salvador
Imaging, Salvadors founder, David W. Gardner, became a
holder of more than 5% of our stock and also became an employee
of Photon Dynamics through its wholly owned subsidiary
Salvador Imaging. In addition, as part of the consideration paid
in this acquisition, the Company issued a promissory note to a
trust of which Mr. Gardner is the trustee. The note bears
interest at an annual rate of 5%. At September 30, 2007,
approximately $5.3 million was outstanding, which included
approximately $47,000 in interest.

The Audit Committee has the responsibility under its written
charter to review and approve related party transactions, to the
extent not previously approved by another independent committee
of the Board. The full board reviewed and approved the
transaction described above.

Photon Dynamics has entered into indemnity agreements with
certain officers and directors which provide, among other
things, that Photon Dynamics will indemnify such officer or
director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements
he or she may be required to pay in actions or proceedings which
he or she is or may be made a party by reason of his or her
position as a director, officer or other agent of Photon
Dynamics, and otherwise to the fullest extent permitted under
California law and Photon Dynamics Bylaws.

Photon Dynamics has entered into indemnity agreements with
certain officers and directors which provide, among other
things, that Photon Dynamics will indemnify such officer or
director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements
he or she may be required to pay in actions or proceedings which
he or she is or may be made a party by reason of his or her
position as a director, officer or other agent of Photon
Dynamics, and otherwise to the fullest extent permitted under
California law and Photon Dynamics Bylaws.

On November 30, 2005, Mr. Hawthorne exercised an
option to purchase 10,000 shares of Photon Dynamics
Common Stock, with a net value realized (the difference between
the exercise price and the fair market value of such shares,
based on the closing sales price reported on the Nasdaq National
Market for the date of exercise) of $77,750.

On March 5, 2001, Photon Dynamics loaned
$250,000 to Mr. Delmore, the former Vice President of
Marketing, Strategy and Business Development of Photon Dynamics,
under a full recourse promissory note, which was secured by
shares of Photon Dynamics Common Stock owned by
Mr. Delmore. This loan bore interest at an annual rate of
7%. From October 1, 2003 to July 29, 2004, the largest
aggregate indebtedness of Mr. Delmore under this loan was
$308,333, including principal and accrued interest. On
July 29, 2004, Mr. Delmore repaid all outstanding
principal and accrued interest under the loan.

Photon Dynamics has entered into indemnity
agreements with certain officers and directors which provide,
among other things, that Photon Dynamics will indemnify such
officer or director, under the circumstances and to the extent
provided for therein, for expenses, damages, judgments, fines
and settlements he or she may be required to pay in actions or
proceedings which he or she is or may be made a party by reason
of his or her position as a director, officer or other agent of
Photon Dynamics, and otherwise to the fullest extent permitted
under California law and Photon Dynamics Bylaws.